The ₹1-lakh question: When does a small UPI merchant stop being 'small'?

Merchants receiving up to ₹1 lakh a month in eligible UPI QR payments remain outside the new MDR regime, but repeated breaches can trigger reclassification to P2M

The government’s decision earlier this week to impose merchant charges on some Unified Payments Interface (UPI) transactions has created confusion among digital payment players. One key question is who will be treated as a ‘small merchant’. Under the new framework, merchants receiving up to ₹1 lakh a month in eligible UPI payments fall in this category.

 

Merchants classified under the Person-to-Person-Merchant (P2PM) category can continue to accept UPI payments without paying the new 0.4 per cent Merchant Discount Rate (MDR), even when an individual transaction is above ₹2,000.

 

However, if a merchant receives more than ₹1 lakh in UPI payments for three consecutive months, the classification changes. The merchant is then moved to the Person-to-Merchant (P2M) category, where eligible UPI transactions above ₹2,000 can attract MDR.

 

 

This raises several questions. If a merchant crosses the ₹1 lakh UPI payment limit for three months but falls below it in the fourth, will the merchant be moved back to the P2PM category? Or will MDR continue to apply? Could merchants deliberately keep UPI collections below the limit to avoid MDR, and would that attract scrutiny? In other words, when does a small UPI merchant stop being considered “small”?

 

Importantly, the ₹1 lakh limit is not linked to the merchant’s total business turnover. It applies only to eligible UPI payments received through QR codes and credited directly to the merchant’s account.

Why ₹1 lakh?

The ₹1 lakh threshold is not new to the latest MDR framework. Ranadurjay Talukdar, partner and payments sector leader at EY India, said the threshold comes from the earlier P2PM operating model for small and unorganised merchants.

 

"It was designed as a simple, system-observable proxy for merchant scale," Talukdar told Business Standard.

 

He said banks and UPI applications can track inward UPI payments, but may not always have access to a merchant's total turnover or GST data.

 

The ₹1 lakh threshold is therefore an administrative measure and not a measure of the merchant's overall business size.

 

Talukdar also clarified that the limit does not include cash, card or other non-UPI receipts. It covers only eligible UPI payments received through QR codes and credited directly to the merchant's own account.

 

This means a merchant's total business receipts can be above ₹1 lakh even if eligible UPI collections remain below the threshold.

Is ₹1 lakh still relevant in 2026?

Merchant businesses vary widely in margins, ticket sizes and payment patterns. ₹1 lakh in monthly UPI collections can mean very different levels of business activity for a street vendor, retailer, service provider or a merchant selling high-value goods or services.

 

"Merchant margins, ticket sizes, seasonality and digital-payment penetration vary substantially across sectors and locations," Talukdar said.

 

He said the threshold could, over time, be reviewed using actual P2PM transaction patterns, inflation, geography and the economics of different sectors.

 

"Any differentiated approach, however, must remain simple enough for banks and acquirers to administer and merchants to understand," he said.

 

The challenge, therefore, is not just deciding the threshold, but also making sure it works consistently across very different types of businesses.

What happens to seasonal merchants?

A merchant is not moved to the P2M category after crossing ₹1 lakh in a single month.

 

The merchant must receive more than ₹1 lakh in inward UPI payments for three consecutive months before being formally shifted to P2M. According to the finance ministry, acquiring banks and payment service providers use transaction velocity checks to monitor the threshold.

 

The ministry says this provides some protection against a one-off rise in collections.

 

"The three-consecutive-month rule is preferable to reclassifying a merchant after a single spike," Talukdar said.

 

For instance, higher sales during a festival, wedding season or a temporary sales event would not change a merchant's status after just one month.

 

However, three months can still cover an entire seasonal cycle for businesses linked to tourism, festive retail, agriculture or education, he said.

 

“The framework should therefore clarify whether reclassification is permanent, whether merchants can return to P2PM after a sustained decline, and how quickly a merchant is notified and migrated,” Talukdar said.

 

Sridhar Guntuku, VP, alliances and partnerships at Decentro, a full-stack API banking platform, said the three-month framework provides a reasonable basis for establishing a merchant's transaction pattern.

 

"Businesses with seasonal or fluctuating collections may require greater nuance," Guntuku told Business Standard.

 

He said banks and payment providers will need to classify merchants consistently while also taking genuine changes in business activity into account.

 

"Clear operational guidance and standardised processes will be critical to ensuring the framework is applied consistently without creating friction for legitimate businesses," Guntuku said.

Can merchants split payments across multiple QR codes?

Experts said merchants using several QR codes, UPI handles or bank accounts could make it harder for a single acquiring institution to determine their total UPI collections.

 

Guntuku said identifying the same merchant across different payment channels can be difficult with the tools currently available.

 

"The effectiveness of this process ultimately depends on how consistently merchant information is captured, standardised and mapped across ecosystem participants," he said.

 

The issue is not limited to multiple QR codes with the same bank. A merchant may also use different banks or payment providers.

 

"At present, visibility is largely limited to transactions and merchant relationships within individual ecosystems," Guntuku said.

 

Since merchants may deal with several banks and payment providers, building a single view of their total UPI collections remains difficult, he said.

 

"A broader ecosystem-level mechanism to aggregate merchant activity could provide greater clarity, while balancing data-sharing, privacy and operational considerations," Guntuku said.

 

Talukdar said patterns such as repeated monthly receipts just below ₹1 lakh, sudden shifts in transactions between linked QR codes, or multiple merchant identities operating from the same location could require scrutiny. At the same time, genuine multi-outlet businesses would need a way to show that their operations are separate, he said.

What changes after a merchant crosses the threshold?

For a P2PM merchant, UPI payments continue to carry zero MDR, even when individual transactions are above ₹2,000.

 

Once the merchant is moved to the P2M category, eligible transactions above ₹2,000 can attract MDR.

 

According to the finance ministry, the MDR on P2M UPI transactions above ₹2,000 will be 0.4 per cent, capped at ₹300 for transactions of ₹75,000 and above. Transactions of up to ₹2,000 will continue to carry zero MDR for merchants.

 

The impact could be greater on low-margin businesses, where even a small payment acceptance cost can matter.

 

"The policy objective should be to make migration feel like graduation," Talukdar said.

 

He said this would require advance notice, simple P2M onboarding, transparent pricing and services that offer additional value to a growing merchant.

 

"A graduated transition or temporary protection for newly reclassified merchants may also be worth evaluating," he said, while clarifying that this would be a policy enhancement and is not part of the currently published framework.

Could the threshold affect digital adoption?

A key policy question is whether merchants that are growing through digital payments could face higher costs as their UPI collections rise.

 

Talukdar said the risk would be greater for low-margin businesses. However, consumers do not pay the MDR, and transactions of up to ₹2,000 remain zero-MDR.

Can the proposed small-merchant fund help?

The finance ministry said a dedicated fund will support merchant onboarding and UPI growth, particularly in Tier III-VI centres, the Northeast, Jammu and Kashmir and Ladakh. The detailed structure of the fund will be worked out with the Reserve Bank of India (RBI) within three months.

 

Business Standard earlier reported that the proposed fund is expected to receive around ₹700 crore annually.

 

Experts said its impact will depend on how the fund is structured, how money is allocated and what incentives are offered to merchants.